The recent consultation on the future evolution of Nest seeks to expand its remit in a number of ways, but principally in providing retirement income products. However, is Nest right when it claims its members lack appropriate choices and that it should step into the breach?
An insight into Nest’s own view of the market – the market it thinks does not serve its members – can be gleaned from its own response to the consultation. Nest says “the wider pensions industry” focuses on “mass affluent savers” with “pot sizes of £100,000 or more”.
Nest’s view is that the pensions industry does not serve mass market savers. These savers are not defined but presumably the “mass market” applies to people with pot sizes less than £100,000. Let us test Nest’s view.
Firstly, annuities. Annuities are widely available on the open market at purchase prices of £10,000 and above. They are available to existing customers of individual insurers at lower purchase prices. Annuity choice is also available to Nest members from £1,500 “at similar market rates to those with larger pots”.
From this brief market review, it is safe to assume the vast majority of mass market savers, including those with the smallest pots, can buy a competitive annuity if that is their preference.
And what about drawdown? Well, that is available to people with just £1 of savings. The drawdown fund can be built up with regular monthly contributions of £100 or less. Or single contributions of £1,000. Or transfer values (say from Nest) of £5,000 or less.
The charges for DIY drawdown are also very competitive with platform and passive funds (just like the passive funds that Nest use) for 50 basis points or less. Therefore, drawdown also serves the bottom of the mass market at very competitive charge levels.
“There is already oodles of choice, at competitive prices, even for those savers with the smallest pension pots. So it is difficult to see the gap in the market that Nest seeks to fill”
It is arguable whether those with the smallest pots actually need complex solutions anyway. Most people with savings of £20,000 or less would probably benefit most by either taking their whole pot as a lump sum or drawing it as smaller lump sums over three or four years to minimise tax.
That leaves mass market customers in the £20,000 to £100,000 bracket.
We can already conclude that at this level customers have a wide choice of annuities and DIY drawdown. But what about those who want some exposure to investment risk and some longevity protection?
Investment-linked annuities are also available from £10,000 purchase price or savers can blend a conventional annuity with drawdown to best suit their needs. Those who want to wait and see are also catered for, either parking their drawdown money in cash or buying a fixed-term annuity.
There is already oodles of choice, at competitive prices, even for those savers with the smallest pension pots. So it is difficult to see the gap in the market that Nest seeks to fill.
If Nest’s members have difficulty negotiating the market then I am sure it could assemble a competitive range of drawdown, investment-linked annuities and fixed-term annuities to add to its existing lifetime annuity panel. It might also persuade Pension Wise to offer bespoke guidance on these carefully selected options.
Nest is in danger of seeking to solve a problem that does not even exist. Whichever option it decides to take, it is clear market failure is not an issue.
John Lawson is head of financial research at Aviva